Central Canada’s ice storm
has brought with it the inevitable: complaints of price "gouging"
by merchants. Candles, formerly $1 a box, were marked up as high
as $4, reports say. Prices temporarily skyrocketed for batteries,
firewood, propane, gasoline, bottled water and a host of other items.

"No one should be permitted
to profit from the misery of others," people rage. The truth is,
these sudden, exorbitant price increases serve a useful purpose.
Instead of vilifying the so-called gougers for their greed, we should accept
them as important and necessary players in the price system—the system
which keeps the economy of a distressed region operating as smoothly and
impartially as possible under the circumstances.

Take candles, for example.
Ordinarily, most people have little use for them. During a power
failure, everybody suddenly needs them. Storekeepers are as much
taken by surprise as consumers. They have only enough candles in
stock to satisfy their normal low demand. Faced with a sudden surge
in demand, they have two choices: continue to sell candles at their
normal price, or raise the price.

If they continue selling
at the normal price, they will quickly sell out. There will be no
candles left for those shoppers who are slower than their neighbours in
reaching the decision to buy candles. It won't matter how desperately
the latecomers need candles--there won't be any available.

Suppose instead that merchants
decide to quadruple the price of candles. Would-be purchasers will
be shocked at the new stickers. Among those shoppers will be some
who already have a supply of candles or some other alternative, such as
kerosene lamps, and were merely intending to stock up just for good measure.

"Four dollars for a box of
candles?" they'll say. "Phooey on that! I'll just use what
I've got first and buy candles later when prices have returned to normal."

Others will say, "I was planning
to buy three boxes, but at that ridiculous price I'll just take one."

The result? More candles
will be left for latecomers to buy. Those who didn't already have
a supply, and therefore needed them quite desperately, will be able to
find some, even though the price may be steep. As well, all shoppers
(both those who decide to buy and those who decide not to) will have been
alerted to the fact that candles are in short supply—something they might
not have realized if they had been able to purchase them at the normal
price. They will become more sparing in their use of candles, knowing
how expensive and difficult they'll be to replace during the immediate
crisis. Spontaneous candle conservation will occur. The severity
of the candle shortage will be alleviated.

Besides encouraging conservation,
price increases play another beneficial role: they induce a rapid
increase in supply. Storekeepers who suddenly find themselves able
to make a huge profit on candles will do their utmost to get in a new supply.
People outside the stricken region who hear about huge profits to
be made on candles will rush to the area with a stock of candles.

This will further assist
in alleviating the severity of the shortage. As truckloads of candles
flow into the area, competition among vendors will soon reduce the price
down to its former level—just as it did before the crisis began.

Price increases are simply
one method of rationing scarce goods among competing users. It’s not perfect, but the alternatives
are even worse. Suppose the government had quickly passed a law making
it illegal to sell candles at more than $1 per box. Knowing that
they will immediately sell out at that price, storekeepers would be able
to pick and choose which customers they wish to favour. This would
present an opportunity to curry favour with local politicians, bureaucrats
or other people of influence. A system that allocates goods by "pull"
is surely no more fair than one which allocates goods by price. In
normal times, we call this corruption.

Or suppose ration coupons
had been issued for candles, so that everyone became entitled to buy an
equal but restricted number at $1 per box. This system would allocate candles
to people who don't really need them (those with an emergency supply or
other alternatives) and deny an adequate supply to people who need them
most urgently (those with absolutely none). A black market in ration coupons
would soon develop. Those who need more candles than their ration
coupons permit would end up paying inflated prices for them anyhow—because
they would first have to buy black-market ration coupons, then the candles.
The only difference is that the windfall profit would go to those who sell
their unneeded ration coupons, rather than to storekeepers.
There is nothing to commend such an outcome as more fair than simply allowing
candle prices to rise. And there is a major disadvantage to
this rationing scheme: it eliminates the incentive for vendors and outsiders
to rush in with increased supplies.

Is it unfair that some people
get to use old $1 candles while others end up using new $4 candles?
Not really. Everyone knows that candles (or candle alternatives)
are a useful thing to have on hand in case of an emergency. Those
who maintained a supply were actually tying up a small portion of their
capital, perhaps for years, to give themselves this extra security.
They made the decision to forego the purchase of some other commodity,
or interest on their capital, in order to keep a supply of emergency goods
on hand. Compared with those who didn't stockpile any candles, they
had already made a financial sacrifice. While this outlay may be
negligible in the case of candles, it could be significant in the case
of generators. Those who chose instead to be unprepared merely took
their financial lumps later, in a more obvious and painful way.